Karvy puts ‘Sell’ call on Mercator Lines

MUMBAI: Karvy Stock Broking has revised its rating on Mercator Lines from underperformer to Sell. The brokerage has said that the stock has run-up around 73 per cent from its target price of Rs 23.

Mercator lines (consolidated) reported the revenue growth of 15.2% YoY (QoQ increase of 1.2%) to Rs 5.37 billion due to acquisition of vessels in dry bulk and dredging segment and commencement of coal mining business.

EBIDTA margins declined from 43.8% in Q4FY08 to 39% in Q4FY09 as against our expectation of 37.8%. The margin decline was on account of decline in freight rates in tanker and drybulk segment. The operating profit increased by 2.4% YoY to Rs 2.1 bn. Interest and depreciation increased by 26.5% to Rs 428mn and by 75.3% to Rs 831 mn respectively due to vessel acquisition. Adjusted profit declined by 54.7% YoY to Rs 545 mn, translating into EPS of Rs 2.3.

For FY09, Consolidated revenue increased 51.9% to Rs22 bn and profit increased by 56.9% to Rs 4.13 bn, translating into EPS of 14.7. At current price of Rs 57, the stock is trading at 3.6xFY2009 and 24.9xFY10 earnings and EV/EBIDTA it is trading at 3.7xFY09 and 7.9xFY10E. Considering significant (~75 to 85%) decline in freight rates on YoY basis and expected lower earnings, we maintain our valuation to 30% discount to NAV with target price of Rs 23. We are revising our rating from underperformer to SELL due to 73% increase in stock price since our last update on 29th April 2009,��� the brokerage report said.